1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission File Number 0-25400
DAISYTEK INTERNATIONAL CORPORATION
----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2421746
- ------------------------------- --------------------------
(State of Incorporation) (I.R.S. Employer I.D. No.)
1025 CENTRAL EXPRESSWAY SOUTH, SUITE 200, ALLEN, TX 75013
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 881-4700
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
At February 7, 2001 there were 17,678,159 shares of the registrant's common
stock issued, including 3,013,600 shares of common stock in treasury.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 2000
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 2000 (Unaudited)
and March 31, 2000......................................................... 3
Unaudited Interim Consolidated Statements of Operations for the
Three and Nine Month Periods Ended December 31, 2000 and
1999 ...................................................................... 4
Unaudited Interim Consolidated Statements of Cash Flows for the
Nine Months Ended December 31, 2000 and 1999............................... 5
Notes to Unaudited Interim Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................................ 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 26
Item 6. Exhibits and Reports on Form 8-K ................................................... 26
SIGNATURES............................................................................................ 27
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, MARCH 31,
ASSETS 2000 2000
------------ ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents ............................................. $ 1,915 $ 28,186
Accounts receivable, net of allowance for doubtful accounts of
$4,736 and $6,031 at December 31, 2000 and ........................ 161,025 167,705
March 31, 2000, respectively
Inventories, net ...................................................... 130,215 96,371
Prepaid expenses and other current assets ............................. 12,384 12,352
Income taxes receivable ............................................... 414 3,714
Deferred tax asset, net ............................................... 131 249
------------ ------------
Total current assets .................................... 306,084 308,577
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Furniture, fixtures and equipment ..................................... 22,444 52,491
Leasehold improvements ................................................ 2,473 5,692
------------ ------------
24,917 58,183
Less - Accumulated depreciation and amortization ...................... (14,596) (27,523)
------------ ------------
Net property and equipment .............................. 10,321 30,660
OTHER ASSETS .............................................................. -- 528
EMPLOYEE RECEIVABLES ...................................................... 558 518
EXCESS OF COST OVER NET ASSETS ACQUIRED, net .............................. 46,957 37,003
------------ ------------
Total assets ............................................ $ 363,920 $ 377,286
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ..................................... $ 3,469 $ 42,392
Trade accounts payable ................................................ 128,534 97,518
Accrued expenses ...................................................... 13,310 14,746
------------ ------------
Total current liabilities ............................... 145,313 154,656
------------ ------------
LONG-TERM DEBT, less current portion ...................................... 56,389 2,431
COMMITMENTS AND CONTINGENCIES
CONTRACT TO PURCHASE COMPANY'S STOCK ...................................... 494 --
MINORITY INTEREST ......................................................... -- 9,513
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized
at December 31, 2000 and March 31, 2000; none issued
and outstanding ................................................... -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized at December 31, 2000 and March 31, 2000;
17,671,101 and 17,600,164 shares issued, including shares in
treasury, at December 31, 2000 and March 31, 2000, respectively ... 177 176
Additional paid-in capital ............................................ 94,137 136,736
Retained earnings ..................................................... 89,296 76,340
Accumulated other comprehensive income ................................ (3,091) (2,566)
------------ ------------
180,519 210,686
Less cost of common stock held in treasury, 2,987,100 shares and
zero shares at December 31, 2000 and March 31, 2000,
respectively ...................................................... 18,795 --
------------ ------------
Total shareholders' equity .............................. 161,724 210,686
------------ ------------
Total liabilities and shareholders' equity .............. $ 363,920 $ 377,286
============ ============
The accompanying notes are an integral part of these consolidated
balance sheets.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net revenues ..................................... $ 298,323 $ 283,087 $ 866,010 $ 763,013
Cost of revenues ................................. 266,782 258,491 771,992 685,224
------------ ------------ ------------ ------------
Gross profit ............................. 31,541 24,596 94,018 77,789
Selling, general and administrative expenses ..... 26,331 26,501 76,248 69,887
Acquisition related costs ........................ -- -- -- 619
Reversal of loss on disposition of business ...... -- -- -- (1,000)
------------ ------------ ------------ ------------
Income (loss) from operations ............ 5,210 (1,905) 17,770 8,283
Interest expense, net ............................ 1,625 1,452 3,769 3,222
------------ ------------ ------------ ------------
Income (loss) before income taxes ........ 3,585 (3,357) 14,001 5,061
Provision for income taxes ....................... 1,379 30 5,741 3,313
------------ ------------ ------------ ------------
Income (loss) before minority interest ... 2,206 (3,387) 8,260 1,748
Minority interest ................................ -- 488 47 488
------------ ------------ ------------ ------------
Net income (loss) ........................ $ 2,206 $ (2,899) $ 8,307 $ 2,236
============ ============ ============ ============
Net income (loss) per common share:
Basic ..................................... $ 0.15 $ (0.17) $ 0.51 $ 0.13
============ ============ ============ ============
Diluted ................................... $ 0.15 $ (0.17) $ 0.50 $ 0.13
============ ============ ============ ============
Weighted average common and common share
equivalents outstanding:
Basic ..................................... 14,989 17,200 16,356 17,179
Diluted ................................... 15,065 17,200 16,453 17,837
The accompanying notes are an integral part of these unaudited
interim consolidated statements.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
DECEMBER 31,
----------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 8,307 $ 2,236
Adjustments to reconcile net income to net cash provided by
operating activities --
Depreciation and amortization ................................... 5,733 6,575
Provision for doubtful accounts ................................. 2,749 6,706
Minority interest ............................................... (47) (488)
Deferred income tax (benefit) provision ......................... 246 (477)
Changes in operating assets and liabilities --
Accounts receivable ......................................... 4,613 (15,860)
Inventories, net ............................................ (24,184) 16,602
Prepaid expenses and other current assets ................... (4,547) 1,820
Trade accounts payable and accrued expenses ................. 26,216 (6,528)
Income tax receivable ....................................... 2,528 (3,754)
----------- -----------
Net cash provided by operating activities .............. 21,614 6,832
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................ (5,310) (12,072)
Disposition of subsidiary .......................................... (22,113) --
Acquisitions of businesses, net of cash acquired ................... (10,205) (20,448)
Advances to employees, net ......................................... (45) (144)
Decrease in note receivable and other assets ....................... 1,655 3,446
----------- -----------
Net cash used in investing activities .................. (36,018) (29,218)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit, net ........................ 14,505 8,825
Payments on capital leases and notes payable ....................... (7,842) (8,511)
Purchase of treasury stock ......................................... (18,795) --
Net proceeds of PFSweb initial public offering ..................... -- 53,014
Net proceeds from exercise of stock options and issuance
of common stock .................................................. 707 1,378
----------- -----------
Net cash provided by (used in) financing activities .... (11,425) 54,706
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS................... (442) (178)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... (26,271) 32,142
CASH AND CASH EQUIVALENTS, beginning of period ......................... 28,186 1,551
----------- -----------
CASH AND CASH EQUIVALENTS, end of period ............................... $ 1,915 $ 33,693
=========== ===========
The accompanying notes are an integral part of these unaudited
interim consolidated statements.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- OVERVIEW AND BASIS OF PRESENTATION
Daisytek International Corporation and its subsidiaries ("the Company" or
"Daisytek") is a leading wholesale distributor of computer, copier, fax and
office supplies products ("computer and office supplies") and professional audio
and videotape products ("professional tape products"). Prior to the spin-off of
PFSweb, Inc. ("PFSweb") on July 6, 2000, the Company was also a leading provider
of transaction management services to both traditional and electronic commerce,
or e-commerce, companies. The Company's two reportable segments are strategic
business units that offer different products and services and are managed
separately based on fundamental differences in their operations.
Computer and Office Supplies
The computer and office supplies products include laser toner, inkjet
cartridges, copier and fax supplies, printer ribbons, diskettes, optical storage
products, computer tape cartridges, accessories such as cleaning kits and media
storage files, paper, envelopes and business forms, writing instruments, office
machines and all desktop supplies. These products are used in a broad range of
computers and office automation products including laser and inkjet printers,
photocopiers, fax machines and data storage products. The Company's computer and
office supplies customers include value-added resellers, computer supplies
dealers, office product dealers, contract stationers, buying groups, computer
and office product superstores, drug and convenience stores, dot-coms, direct
marketers and other retailers who resell the products to end-users. The computer
and office supplies segment distributes products primarily in the United States,
Canada, Australia, Mexico, Argentina, certain other parts of South America, the
Pacific Rim and Europe.
Professional Tape Products
In January 1998, the Company expanded its product line by acquiring
Steadi-Systems, Ltd. ("Steadi-Systems"), an independent wholesale distributor of
professional tape products and related hardware to the filmed entertainment and
multimedia industries. The Company further expanded its operations in the
distribution of pro-tape products through the acquisition of The Tape Company in
June 1998 and the purchase of the professional tape division of Videotape
Products, Inc. ("VTP") in March 1999. Through Steadi-Systems, The Tape Company,
and VTP, the Company distributes a wide array of professional-grade audio and
video media products to customers including production companies,
post-production operations, broadcast stations, corporate in-house production
facilities, advertising agencies, and cable television providers.
PFSweb Spin-off
In December 1999, PFSweb completed an initial public offering ("IPO") of
3,565,000 shares of its common stock. On July 7, 2000, the Company announced the
completion of the spin-off of PFSweb by means of a tax-free distribution of the
Company's remaining 80.1 percent ownership of PFSweb. The pro rata distribution
of 14,305,000 shares of PFSweb was made at the close of business July 6, 2000 to
Daisytek shareholders of record as of June 19, 2000 (the "Record Date"). Based
on the shares outstanding of each company on the Record Date, Daisytek
shareholders received approximately 0.81 shares of PFSweb stock for each share
of Daisytek stock they owned on the Record Date. In June, 2000, the Company
received a favorable private letter ruling from the Internal Revenue Service
regarding the tax-free treatment of the distribution of Daisytek's remaining
ownership in PFSweb. See also Note 9 of these Notes to Unaudited Interim
Consolidated Financial Statements.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table represents the balance sheet information for PFSweb as
of the date of the spin-off, and is provided to assist in understanding the
impact of the disposition on the consolidated balance sheet of the Company
(amounts in thousands):
ASSETS
Cash......................................... $ 22,113
Accounts receivable, net..................... 10,879
Prepaid expenses and other current assets.... 3,420
Property and equipment, net.................. 21,557
Other assets................................. 501
--------
Total assets................................. $ 58,470
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of long-term debt............ $ 281
Trade accounts payable....................... 5,190
Accrued expenses............................. 3,336
Long-term debt, less current portion......... 2,342
Shareholders' equity......................... 47,321
--------
Total liabilities and shareholders' equity... $ 58,470
========
The PFSweb business unit was formed in 1991 and expanded in 1996 under the
name "Priority Fulfillment Services." PFSweb is an international provider of
transaction management services to both traditional and e-commerce companies.
PFSweb provides its services under fee-based contracts where service fee revenue
is based on either the sales value of the products or service activity volume.
Both PFSweb and Daisytek are parties to various agreements providing for the
separation of their respective business operations. The agreements govern
various ongoing relationships between the companies including the transaction
management services that PFSweb provides for Daisytek and the transitional
services that Daisytek provides to PFSweb and a tax indemnification and
allocation agreement, which governs the allocation of tax liabilities and sets
forth provisions with respect to other tax matters. All of the agreements
between the Company and PFSweb were made in the context of a parent-subsidiary
relationship and were negotiated in the overall context of the spin-off. The
Company believes that the terms of these agreements are consistent with fair
market values, although certain material terms and provisions of various
agreements continue to be the subject of ongoing negotiations. However, there
can be no assurances that the prices charged to, or by, each company under these
agreements are not higher or lower than the prices that may be charged to, or
by, unaffiliated third parties for similar services.
In the opinion of management, the Unaudited Interim Consolidated Financial
Statements of the Company include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position as of December 31, 2000, its results of operations for the
three and nine months ended December 31, 2000 and 1999, and its results of cash
flows for the nine months ended December 31, 2000 and 1999. Results of the
Company's operations for interim periods may not be indicative of results for
the full fiscal year. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations promulgated by the Securities and Exchange Commission (the "SEC").
The Unaudited Interim Consolidated Financial Statements should be read in
conjunction with the audited Consolidated Financial Statements and accompanying
notes of the Company included in the Company's Form 10-K (File Number 0-25400)
as filed with the SEC on June 29, 2000 (the "Company's Form 10-K"). Accounting
policies used in the preparation of the Unaudited Interim Consolidated Financial
Statements are consistent in all material respects with the accounting policies
described in the Notes to Consolidated Financial Statements in the Company's
Form 10-K.
Certain prior period data has been reclassified to conform to the current
period presentation. These reclassifications had no effect on previously
reported net income, shareholders' equity or cash flows.
NOTE 2 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income consists of net income and other gains and losses
affecting shareholders' equity that, under generally accepted accounting
principles, are excluded from net income, such as unrealized gains and losses on
investments available for sale and foreign currency translation gains and
losses. Currency translation and other
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
derivative foreign currency exchange contracts are the only items of other
comprehensive income impacting the Company.
The following table sets forth comprehensive income (loss) (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net income (loss) ...................... $ 2,206 $ (2,899) $ 8,307 $ 2,236
Comprehensive income adjustments:
Foreign currency translation
adjustment ..................... 256 92 (525) 90
------------ ------------ ------------ ------------
Comprehensive income (loss) ............ $ 2,462 $ (2,807) $ 7,782 $ 2,326
============ ============ ============ ============
NOTE 3 - NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Basic net income per common share is calculated by dividing net income by
the weighted-average number of common shares outstanding for each period.
Diluted net income per share is calculated by dividing net income by the
weighted average common shares and common share equivalents outstanding for each
period. The difference between the Company's basic and diluted weighted average
common shares outstanding is due to dilutive common stock options outstanding.
During the three months ended December 31, 1999, outstanding options to purchase
4,266,988 common shares were anti-dilutive and have been excluded from the
weighted average share calculation.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------- ---------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
NUMERATOR:
Net income (loss) ............................. $ 2,206 $ (2,899) $ 8,307 $ 2,236
============== ============== ============== ==============
DENOMINATOR:
Denominator for basic earnings per share - .... 14,989 17,200 16,356 17,179
Weighted average shares
Effect of dilutive securities:
Employee stock options ...................... 76 -- 97 658
-------------- -------------- -------------- --------------
Denominator for diluted earnings per share -
Adjusted weighted average shares and
assumed conversions..................... 15,065 17,200 16,453 17,837
============== ============== ============== ==============
NET INCOME (LOSS) PER COMMON SHARE:
Basic ....................................... $ 0.15 $ (0.17) $ 0.51 $ 0.13
============== ============== ============== ==============
Diluted ..................................... $ 0.15 $ (0.17) $ 0.50 $ 0.13
============== ============== ============== ==============
NOTE 4 - BUSINESS COMBINATIONS
On May 3, 2000, the Company acquired certain assets and liabilities of B.A.
Pargh Company, LLC, a wholesaler of office products and customer of PFSweb, for
approximately $3.0 million, of which approximately $1.0 million is subject to
adjustment for realization of assets at lower than book value acquired. In
addition, as part of this acquisition, the Company paid off approximately $6.5
million in assumed debt. The acquisition was accounted for by the purchase
method of accounting for business combinations and the related goodwill is being
amortized over 20 years. The entire cost of the acquisition was funded through
the Company's credit facility. This acquisition is not material to the financial
position or results of operations of the Company.
Effective October 1, 2000, the Company acquired the capital stock of Etertin
y CIA, S.A. in Buenos Aires, Argentina, a wholesale distributor of computer
supplies and accessories, for approximately $5.8 million, of which $1.0 million
is subject to adjustment for realization of assets at lower than book value
acquired. In addition, the Company assumed approximately $4.7 million in debt.
The acquisition was accounted for by the purchase method of accounting for
business combinations and the related goodwill is being amortized over 20 years.
The entire cost
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of the acquisition was funded through the Company's credit facility. This
acquisition is not material to the financial position or results of operations
of the Company.
On October 1, 1999, the Company acquired certain assets and liabilities of
Arlington Industries, Inc. a specialty wholesaler of copier and fax consumables,
for an initial price of approximately $19.5 million. This transaction was
accounted for by the purchase method of accounting and the related goodwill is
being amortized over 20 years. The purchase agreement provides for an adjustment
to the purchase price based on certain performance criteria for each of the
twelve-month periods ended September 30, 2000 and 2001. The first performance
period has been achieved, and the Company has increased the original purchase
price and goodwill by approximately $1.6 million, which will be amortized over
the remaining life of the asset.
NOTE 5 - DEBT
In December 2000, the Company entered into an agreement with certain banks
for a new revolving line of credit facility in the United States (the
"Facility") that has a maximum borrowing availability of $120.0 million and
expires on December 19, 2003. The Facility also includes an expandable feature
to increase the maximum borrowing to $170 million, subject to various conditions
precedent. Availability under the Facility is subject to certain borrowing base
limitations, including eligible accounts receivable and inventory, as defined.
The Facility replaces the Company's previous U.S. credit facility, which would
have expired on January 1, 2001. The Facility accrues interest, at the Company's
option, at the prime rate of the lead bank or a Eurodollar rate plus an
adjustment ranging from 1.05% to 1.75% depending on the Company's financial
performance. A facility fee of 0.20% to 0.375% is charged on the entire
Facility. The Facility contains various covenants including, among other things,
the maintenance of certain financial ratios including the achievement of a
minimum fixed charge ratio and minimum level of net worth, and restrictions on
certain activities, including loans and payments to related parties, incurring
additional debt, acquisitions, investments and asset sales. The Facility is
secured by a pledge of 100% of the stock of the Company's U.S. subsidiaries and
65% of the stock of the Company's material foreign subsidiaries. Upon the
occurrence of a default, the Facility will also be secured by the Company's
other assets. This Facility is part of the Company's integrated cash management
system in which accounts receivable collections are used to pay down the
Facility and disbursements are paid from the Facility. This system allows the
Company to optimize its cash flows.
Additionally, in December 2000, the Company's Australian subsidiary entered
into an agreement with an Australian bank for an unsecured revolving line of
credit facility (the "Australian Facility"). This Australian Facility expires on
January 1, 2002 and replaced the Company's previous Australian revolving line of
credit facility, which would have expired on December 31, 2000. The Australian
facility allows the Company to borrow Australian dollars up to a maximum of $15
million (Australian) or approximately $8.3 million (U.S.) at December 31, 2000.
The Australian Facility accrues interest at the Australian Bill Rate plus an
adjustment ranging from 1.3% to 2.0% depending on the Company's financial
performance. A facility fee of 0.20% to 0.375% is charged on the entire amount
of the Australian facility.
Also, in December 2000, the Company's Canadian subsidiary entered into an
agreement with a Canadian bank for an unsecured revolving line of credit
facility (the "Canadian Facility"). This Canadian Facility expires on January 1,
2002 and replaced the Company's previous Canadian revolving line of credit
facility, which would have expired on December 31, 2000. The Canadian Facility
allows the Company to borrow Canadian or U.S. dollars up to a maximum of $5
million (Canadian) or approximately $3.3 million (U.S.) at December 31, 2000.
For Canadian dollar borrowings, the Canadian Facility accrues interest at the
bank's prime rate or the bank's cost of funds plus an adjustment ranging from
1.3% to 2.0% depending on the Company's financial performance. For U.S. dollar
borrowings, the Canadian Facility accrues interest at the prime rate of the bank
or a Eurodollar rate plus an adjustment ranging from 1.3% to 2.0% depending on
the Company's financial performance. A facility fee of 0.20% to 0.375% is
charged on the entire amount of the Canadian Facility.
During August 1999, the Company's Canadian subsidiary entered into a
separate agreement with a Canadian bank for a revolving term loan (the "Term
Loan"). The Term Loan, which expires on August 31, 2001, allows the Company to
borrow Canadian or U.S. dollars up to a maximum of $10.0 million (Canadian), or
approximately $6.7 million (U.S.) at December 31, 2000. The Term Loan accrues
interest at the Company's option at either the bank's prime rate plus 0.10% or
the bank's U.S. dollar commercial loan rate plus 0.10%. A commitment fee of
0.25% is charged on the unused portion of the Term Loan.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2000, the Company's consolidated unsecured revolving lines
of credit, described above, provided for borrowings up to approximately $138.3
million (in US dollars). There were outstanding balances on the lines of credit
totaling $56.4 million, leaving approximately $81.9 million available for
additional borrowings.
At December 31, 2000, the Company's current portion of long-term debt
relates to liabilities assumed in connection with the acquisition of Etertin in
Argentina, effective October 1, 2000. The Company is currently evaluating
opportunities to obtain a separate financing arrangement in Argentina for this
subsidiary and expects to either contract for a new facility in Argentina before
the end of calendar year 2001 or to finance the working capital requirements of
this subsidiary with availability under the Facility.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
NINE MONTHS ENDED
DECEMBER 31,
-----------------------------
2000 1999
------------ ------------
Cash paid during the period for:
Interest ..................... $ 3,725 $ 3,035
Income taxes ................. $ 2,645 $ 6,835
NOTE 7 - SEGMENT AND GEOGRAPHIC INFORMATION
The Company's reportable segments are strategic business units that offer
different products and services and they are managed separately based on the
fundamental differences in their operations. PFSweb segment revenue includes
revenue earned for certain services provided to the Computer and Office Supplies
segment, which is eliminated as part of the intersegment elimination. In
addition, PFSweb and Computer and Office Supplies net revenues are presented as
management evaluates the businesses under its modified IBM distributor
agreements. No single customer accounted for more than 10% of the Company's net
revenues for the three or nine-month periods ended December 31, 2000 and 1999.
The following tables set forth information as to the Company's reportable
segments (in thousands):
COMPUTER PROFESSIONAL
AND OFFICE TAPE INTERSEGMENT
SUPPLIES PRODUCTS PFSWEB ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
THREE MONTHS ENDED DECEMBER 31, 2000
Net revenues ........................... $ 278,560 $ 19,763 $ -- $ -- $ 298,323
Operating contribution ................. 7,324 730 -- -- 8,054
THREE MONTHS ENDED DECEMBER 31, 1999
Net revenues ........................... $ 253,363 $ 22,908 $ 10,868 $ (4,052) $ 283,087
Operating contribution ................. 4,456 1,011 (5,497) -- (30)
NINE MONTHS ENDED DECEMBER 31, 2000
Net revenues ........................... $ 798,075 $ 61,854 $ 13,370 $ (7,289) $ 866,010
Operating contribution ................. 20,485 2,821 (505) -- 22,801
NINE MONTHS ENDED DECEMBER 31, 1999
Net revenues ........................... $ 679,271 $ 69,922 $ 20,342 $ (6,522) $ 763,013
Operating contribution ................. 19,160 4,340 (6,123) -- 17,377
ASSETS
December 31, 2000 ...................... $ 323,350 $ 40,570 $ -- $ -- $ 363,920
March 31, 2000 ......................... 273,347 43,638 60,405 (104) 377,286
The Company's Computer and Office Supplies segment includes certain expenses
and assets that relate to the Professional Tape Products segment but are not
allocated by management to this segment. These expenses relate primarily to the
Company's (i) centralized management information and telephone systems, and (ii)
executive, administrative and other corporate costs. Certain corporate assets
are also not allocated to Professional Tape Products, and primarily relate to
the Company's centralized management information and telephone systems and
leasehold improvements on shared facilities.
Reconciliation of segment operating contribution (loss) to consolidated
income (loss) before taxes is as follows (in thousands):
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
------------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------- ----------- ------------
Segment operating contribution (loss) .............. $ 8,054 $ (30) $ 22,801 $ 17,377
Acquisition related costs(a) ....................... -- -- -- (619)
Transition and other unallocated costs(b) .......... (2,844) (1,875) (5,031) (9,475)
Reversal of loss on disposition of business ........ -- -- -- 1,000
Interest expense ................................... (1,625) (1,452) (3,769) (3,222)
----------- ----------- ----------- -----------
Consolidated income (loss) before income taxes ..... $ 3,585 $ (3,357) $ 14,001 $ 5,061
=========== =========== =========== ===========
(a) These charges relate to the Professional Tape Products segment.
(b) Transition costs paid by the Company have not been allocated to the
reportable segments. These costs relate to certain repositioning and
separation activities associated with the spin-off of PFSweb and
certain other charges as a result of these activities, and during
the three and nine month periods ended December 31, 1999, to
increase allowances for bad debts, legal and professional fees
related to an unsolicited acquisition offer, and other operating
charges.
NOTE 8 - NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") effective for fiscal years
beginning after June 15, 2000. SFAS 133 requires companies to recognize all
derivative financial instruments as either assets or liabilities in the balance
sheet and measure those instruments at fair value. If certain conditions are
met, a derivative may be used to hedge certain types of transactions, including
foreign currency exposures of a net investment in a foreign operation. SFAS 133
requires gains or losses on these financial instruments to be recognized in
other comprehensive income as a part of the cumulative translation adjustment.
In June 1999, the FASB approved the issuance of SFAS 137 deferring the effective
date of SFAS 133 for one year. Consequently, Daisytek is required to adopt SFAS
133 by April 1, 2001. The impact of SFAS 133 on our financial statements will
depend on a variety of factors, including future interpretative guidance from
the FASB, the future level of forecasted and actual foreign currency
transactions, the extent of our hedging activities, the types of hedging
instruments used and the effectiveness of such instruments. We presently utilize
derivative financial instruments to hedge our net investments in some of our
foreign operations and to hedge against interest rate increases. The Company is
currently evaluating the provisions of SFAS 133 and its effect on the accounting
treatment of these financial instruments.
During 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition." SAB No. 101 requires that revenue generally is realized
or realizable and earned when all of the following criteria are met: (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred or
services have been rendered, (iii) the seller's price to the buyer is fixed or
determinable, and (iv) collectibility is reasonably assured. SAB No. 101 is
effective for the Company's fourth quarter ended March 31, 2001. The Company
believes the impact of adopting SAB No. 101 will not be significant to its
financial statements.
NOTE 9 - STOCK OPTIONS
PFSweb Spin-off
In connection with the completion of the spin-off, as of July 6, 2000, all
outstanding Daisytek options ("Daisytek Pre-spin Options") were adjusted and/or
replaced with Daisytek options (the "Daisytek Post-spin Options") and PFSweb
options (the "PFSweb Post-spin Options," and together with the Daisytek
Post-spin Options, the "Replacement Options").
In general, the exercise price and the number of shares subject to each of
the Replacement Options was established pursuant to a formula designed to ensure
that: (1) the aggregate "intrinsic value" (i.e. the difference between the
exercise price of the option and the market price of the common stock underlying
the option) of the Replacement Option did not exceed the aggregate intrinsic
value of the outstanding Daisytek Pre-spin Option which is replaced by such
Replacement Option immediately prior to the spin-off, and (2) the ratio of the
exercise price of each option to the market value of the underlying stock
immediately before and after the spin-off was preserved.
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Substantially all of the other terms and conditions of each Replacement
Option, including the time or times when, and the manner in which, each option
is exercisable, the duration of the exercise period, the permitted method of
exercise, settlement and payment, the rules that apply in the event of the
termination of employment of the employee, the events, if any, that may give
rise to an employee's right to accelerate the vesting or the time or exercise
thereof and the vesting provisions, is the same as those of the replaced
Daisytek Pre-spin Option, except that option holders who are employed by one
company are permitted to exercise, and are subject to all of the terms and
provisions of, options to acquire shares in the other company as if such holder
was an employee of such other company.
During July 2000, the Company granted approximately 1.8 million stock
options under terms of its stock option compensation plans. The purpose of this
grant is to benefit and advance the interests of Daisytek by rewarding
directors, officers and certain key employees for their contributions to
Daisytek and thereby motivating them to continue to make such contributions in
the future. The stock options, which were granted at market price, vest over a
three-year period from the date of the grant and expire 10 years after the date
of the grant.
As of December 31, 2000, after giving effect to the issuance of the
Daisytek Post-spin Options, combined with the additional options granted during
the second quarter of fiscal 2000, there were approximately 5.5 million options
outstanding with an overall weighted average exercise price of $7.33.
The following table summarizes information about the Company's outstanding
stock options as of December 31, 2000:
RANGE OF OPTIONS WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE
--------------- ----------- --------------
$ 1.50 - $ 3.00 288 $ 1.65
$ 5.00 - $ 6.50 2,706,498 $ 6.16
$ 6.51 - $ 8.00 862,336 $ 7.75
$ 8.01 - $ 9.50 1,599,496 $ 8.08
$ 9.51 - $11.00 96,024 $ 9.72
$11.01 - $12.50 16,188 $11.57
$12.51 - $14.00 2,998 $13.22
$14.01 - $15.50 185,501 $14.31
As of December 31, 2000, using the outstanding shares of 14.7 million and
information from the previous table, the following table summarizes the
Company's diluted weighted average shares at various price points:
DILUTED WEIGHTED
AVERAGE AVERAGE SHARES
SHARE PRICE OUTSTANDING
----------- -----------
$ 7.00 14,895,251
$ 8.00 15,106,287
$ 9.00 15,423,414
$10.00 15,687,181
$11.00 15,907,075
$12.00 16,090,697
$13.00 16,246,531
$14.00 16,380,212
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DAISYTEK INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - STOCK REPURCHASE
On July 10, 2000, the Company's Board of Directors announced the
authorization of the repurchase of up to 10% of the outstanding shares of its
common stock, and on September 13, 2000, announced the authorization of the
repurchase of up to an additional 10% of the outstanding shares of common stock.
These repurchase programs occur periodically, through open market transactions,
subject to prevailing market conditions and other considerations. Based upon the
number of outstanding shares on the date of each authorization, the Company was
authorized to repurchase up to approximately 3.35 million shares. As of December
31, 2000, the Company had repurchased approximately 2.99 million of its
outstanding shares. In connection with this program, the Company sold a
nine-month option, which expires in July 2001, for a premium of $50,000, whereby
the holder can sell 100,000 shares to the Company for $4.94 per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited
Interim Consolidated Financial Statements and related notes appearing elsewhere
in this document.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This document contains both historical and forward-looking statements. All
statements other than statements of historical fact are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of
1934, as amended. You can identify these statements by the fact that they do not
relate strictly to historical or current facts, but rather reflect our current
expectations concerning future results and events. They include words such as
"anticipate," "will," "expect," "estimate," "believe," "intend," "plan,"
"could," "may," "future," "target," and similar expressions and variations
thereof. Forward-looking statements relating to such matters as our financial
condition and operations are based on our management's current intent, belief or
expectations regarding us or our industry. These forward-looking statements are
not guarantees of future performance and involve risks, uncertainties and
assumptions that are difficult to predict. In addition, some forward-looking
statements are based upon assumptions as to future events that may not prove to
be accurate. Therefore, actual outcomes and results may differ materially from
what is expected or forecasted in such forward-looking statements. We undertake
no obligation to publicly update any forward-looking statement for any reason,
even if new information becomes available or other events occur in the future.
Certain factors, including, but not limited to, general economic conditions,
industry trends, the loss of key suppliers or customers, the loss or material
decline in service levels of strategic product shipping and handling
relationships, customer demand, product availability, competition (including
pricing and availability), risks inherent in acquiring, integrating and
operating new businesses, concentrations of credit risk, distribution
efficiencies, capacity constraints, technological or information system
difficulties, exchange rate and interest rate fluctuations, and the regulatory
and trade environment (both domestic and foreign) could cause our actual results
to differ materially from the anticipated results or other expectations
expressed in our forward-looking statements. There may be additional risks that
we do not currently view as material or that are not presently known.
OVERVIEW
Daisytek is a leading wholesale distributor of computer, copier, fax and
office supplies products, and professional audio and videotape products. Prior
to the spin-off of PFSweb, Inc. ("PFSweb") on July 6, 2000, we were also a
leading provider of transaction management services to both traditional and
e-commerce companies. Daisytek's remaining operations are separated into two
business segments: (1) Computer and Office Supplies; and (2) Professional Tape
Products. These reportable segments are strategic business units that offer
different products and services and are managed separately, based on fundamental
differences in their operations. We sell our products and services in the United
States, Canada, Australia, Mexico, Argentina, certain other parts of South
America, the Pacific Rim and Europe.
Our Computer and Office Supplies segment began operations in the United
States in the 1980's and expanded internationally into Canada in 1989, Mexico in
1994, Australia/Asia in 1996 and Argentina in 2000. This segment distributes
over 10,000 nationally known, name-brand computer supplies products to over
30,000 customers. These products are manufactured by over 150 original equipment
manufacturers, including Hewlett-Packard, Canon, Sharp, Lexmark, IBM, Okidata,
Apple, Panasonic, Imation, Epson, Sony, Xerox, Brother and Maxell. We believe we
are one of the world's largest wholesale distributors of computer supplies,
office products, and film and tape media. The B.A. Pargh acquisition in May 2000
has since added to our Computer and Office Supply segment more than 7,000
additional office products and supplies, which are shipped to over 20,000
customer locations.
Our Professional Tape Products segment began in 1998 and currently
distributes more than 3,000 professional tape products to over 26,000 customers.
Our customers primarily include production and broadcast companies, advertising
and governmental agencies, cable television providers, educational institutions
and healthcare providers. Our professional tape products include videotape,
audiotape, motion picture film and data storage media.
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BUSINESS STRATEGY
Daisytek's focus is as a low cost distributor in the growing computer and
office supplies industry and a provider of value-added supply chain and
marketing services in the United States and international markets. We base our
continued growth on the following strategies:
1) Expansion of our existing product offering to include a full line of
office products;
2) Growth of our customer base by investing in the development of emerging
customer channels, particularly in electronic commerce;
3) Development of client services related to our competencies in customer
care and demand generation through our new subsidiary, Virtual Demand;
4) Expansion of our product and service offerings into new international
markets; and
5) Pursuit of acquisitions, where appropriate, to support both operating
and financial strategies.
Our Computer and Office Supplies segment traditionally specialized in
computer supplies that have longer life cycles and lower risk of technological
obsolescence than hardware and software products. This segment now includes a
full line of traditional office products.
We believe that the demand for computer supplies remains strong due to the
advancement and reduction in price points of printer and computer technologies,
which in turn grows the installed base of equipment that consumes the products
we distribute. Continuing automation of the workplace and the tremendous growth
in color printing technologies that use consumable supplies at higher rates also
fuel the demand for the computer supplies product offering. We offer these
products to our domestic customers using value-added services such as
next-business-day delivery, late order cutoff times, order confirmation, product
drop-shipping, and customized product catalogs. We plan to expand sales to
existing customers including those in the contract stationer, VAR, computer and
office-product dealer, and superstore channels, as well as develop newer
customer channels.
We began our expansion of products to include a full line of office products
through the acquisition of B.A. Pargh, which was completed in May 2000. This
acquisition has added over 7,000 products to our existing product lines. In
addition, it has brought new customers that previously had not purchased from
us. The consolidation in the office products industry has required dealers to
focus on gaining efficiencies in their business. As a result, there is an
emerging segment of office product dealers, particularly large contract
stationers and specialized buying groups, who are aggressively seeking a lower
cost alternative to the traditional higher cost office products national
wholesale model. Our low cost distribution model will allow us to service these
customers. Currently, our primary markets are in the Central and Eastern United
States and in Puerto Rico; however, we intend to roll-out in phases a national
marketing and distribution model over the next twelve to eighteen months.
We are also focusing on new customer channels such as mass merchants,
grocery and convenience stores, direct mail marketers and internet business
sites. We have dedicated an internal team to leverage our experience in
e-commerce, telemarketing and computer and office supplies to assist these
customers in including our growing line of products into their own offerings. We
intend to use our suite of electronic services, our lower cost distribution
model, our expanding offering of products, along with our experience in selling
computer and office consumables to aggressively market to these new and emerging
channels.
Daisytek has been testing and recently began implementing new service
programs with various suppliers and business partners. These programs build on
Daisytek's core competencies in customer service and proactive demand
generation. In these programs, Daisytek takes over, on behalf of the supplier,
the management of customer relationships in defined parts of the supplier's or
partner's existing business, or possibly in new business areas. Services
provided fall under categories including database management, proactive outbound
telemarketing, high level customer support and proactive e-marketing. These
services are provided by a newly established, wholly-owned subsidiary of
Daisytek, under the name Virtual Demand, which charges fees on a transaction
basis to our clients. A sales team has been dedicated to this subsidiary and is
currently marketing these service programs to a variety of companies. During the
quarter ended December 31, 2000, two new client programs were established, which
began to generate fee income for services provided.
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16
We continue to research new markets to expand our international computer
supplies business. Many international markets have higher growth opportunities,
for consumable computer supplies in particular, than the United States.
Presently, we operate sales and distribution centers in Canada, Mexico,
Australia and Argentina and export products into Latin America, the Pacific Rim
and throughout much of the rest of the world. Our computer and office supplies
experience and broad product range place us in a favorable competitive position
in emerging international markets. During the quarter ended December 31, 2000,
we opened additional offices and facilities in Perth, Australia, and Mexico City
and Monterrey, Mexico.
We plan to enhance growth by seeking strategic acquisition opportunities in
our computer and office supplies business, or by adding selected product lines
and customers that can capitalize on Daisytek's expertise in distribution and
call-center management, or that may add technology and service offerings to our
business. In this regard, on October 1, 1999, we acquired certain assets and
liabilities of Arlington Industries, Inc., a domestic based specialty wholesaler
primarily focused on copier and fax consumable supplies. On May 3, 2000, we
acquired certain assets and liabilities of B.A. Pargh Company LLC, discussed
previously. Additionally, effective October 1, 2000, we acquired the capital
stock of Etertin y CIA, S.A. in Buenos Aires, Argentina, a wholesale distributor
of computer supplies and accessories.
Daisytek Stand Alone (Excluding PFSweb, Inc.)
The following is an unaudited adjusted historical financial presentation of
the Daisytek business units, excluding PFSweb, for the three and nine month
periods ended December 31, 2000 and 1999. This information is supplemental and
is not intended to be presented in accordance with generally accepted accounting
principles. The presentation takes into account certain one-time costs of
reorganization activities as a result of the separation of Daisytek and PFSweb
of approximately $2.8 million and $5.0 million, respectively, for the three and
nine month periods ended December 31, 2000, which management believes are
incremental to normal operations. For the three and nine month periods ended
December 31, 1999, the presentation excludes incremental costs of $1.9 million
and $9.5 million, respectively, which included these reorganization and
separation activities, increases in allowances for bad debts, and other charges.
This presentation also includes the estimated impact of the transaction
management services agreement between Daisytek and PFSweb for all periods
presented. The presentation excludes acquisition related costs, reversal of loss
on disposition of business and minority interest.
We based the following data on available information and certain
assumptions. We believe that such assumptions provide a reasonable basis for
presenting our results, excluding PFSweb and adjusting for the transactions
described above. This financial information does not reflect what our results of
operations may be in the future.
Adjusted Statements of Income Data:
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
------------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------- ------------ -------------
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
PER SHARE DATA) PER SHARE DATA)
(UNAUDITED) (UNAUDITED)
Net revenues ....................................... $ 298,323 $ 276,271 $ 859,929 $ 749,193
Cost of revenues ................................... 266,782 248,947 767,496 667,480
------------ ------------ ------------ ------------
Gross profit ..................................... 31,541 27,324 92,433 81,713
Selling, general and administrative expenses ....... 23,487 22,847 69,083 62,326
------------ ------------ ------------ ------------
Income from operations ........................... 8,054 4,477 23,350 19,387
Interest expense, net .............................. 1,625 1,316 4,084 2,839
------------ ------------ ------------ ------------
Income before income taxes ....................... 6,429 3,161 19,266 16,548
Provision for income taxes ......................... 2,475 1,228 7,372 6,453
------------ ------------ ------------ ------------
Net income ......................................... $ 3,954 $ 1,933 $ 11,894 $ 10,095
============ ============ ============ ============
NET INCOME PER COMMON SHARE:
Basic ............................................ $ 0.26 $ 0.11 $ 0.73 $ 0.59
============ ============ ============ ============
Diluted .......................................... $ 0.26 $ 0.11 $ 0.72 $ 0.57
============ ============ ============ ============
Weighted average common and common share equivalents
outstanding:
Basic ............................................ 14,989 17,200 16,356 17,179
Diluted .......................................... 15,065 17,200 16,453 17,837
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The following data reflects historical balance sheet information as of December
31, 2000. The balance sheet information as of March 31, 2000, is adjusted to
exclude PFSweb, which was spun-off in July 2000.
Adjusted Balance Sheet Data:
AS OF AS OF
DECEMBER 31, MARCH 31,
2000 2000
------------ ------------
(IN THOUSANDS)
(UNAUDITED)
Working capital, excluding debt .... $ 164,240 $ 168,067
Total assets ....................... 363,920 316,985
Total debt ......................... 59,858 42,144
Shareholders' equity ............... 161,724 172,549
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth consolidated results of operations and other
financial data from Daisytek's unaudited interim consolidated statements of
income, including our 80.1% ownership of PFSweb, Inc. during the periods prior
to the spin-off of PFSweb.
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME DATA:
Net revenues ......................................................... $ 298,323 $ 283,087 $ 866,010 $ 763,013
Cost of revenues ..................................................... 266,782 258,491 771,992 685,224
---------- ---------- ---------- ----------
Gross profit ......................................................... 31,541 24,596 94,018 77,789
Selling, general and administrative expenses ......................... 26,331 26,501 76,248 69,887
Acquisition related costs ............................................ -- -- -- 619
Reversal of loss on disposition of business .......................... -- -- -- (1,000)
---------- ---------- ---------- ----------
Income (loss) from operations ........................................ 5,210 (1,905) 17,770 8,283
Interest expense, net ................................................ 1,625 1,452 3,769 3,222
---------- ---------- ---------- ----------
Income (loss) before income taxes .................................... 3,585 (3,357) 14,001 5,061
Provision for income taxes ........................................... 1,379 30 5,741 3,313
---------- ---------- ---------- ----------
Income (loss) before minority interest ............................... 2,206 (3,387) 8,260 1,748
Minority interest .................................................... -- 488 47 488
---------- ---------- ---------- ----------
Net income (loss) .................................................... $ 2,206 $ (2,899) $ 8,307 $ 2,236
========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE:
Basic .............................................................. $ 0.15 $ (0.17) $ 0.51 $ 0.13
========== ========== ========== ==========
Diluted ............................................................ $ 0.15 $ (0.17) $ 0.50 $ 0.13
========== ========== ========== ==========
Weighted average common and common share equivalents outstanding:
Basic ........................................................... 14,989 17,200 16,356 17,179
Diluted ......................................................... 15,065 17,200 16,453 17,837
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED DECEMBER 31, 2000 AND 1999.
The following discussion relates to Daisytek, and includes the results of
its former subsidiary, PFSweb for the first three months of fiscal year 2001 and
for the entire nine months in fiscal year 2000. Since PFSweb was spun off from
Daisytek on July 6, 2000, financial results for the three-month period ended
December 31, 2000, and for the six months from July 1, 2000 through December 31,
2000, which are included in the nine months ended December 31, 2000, do not
include the financial results of PFSweb. These are historical consolidated
results, including costs associated with separation activities, and may not be
representative of our results subsequent to both the spin-off of PFSweb and the
completion of all related separation activities.
Net Revenues. Net revenues for the three months ended December 31, 2000
were $298.3 million as compared to $283.1 million for the three months ended
December 31, 1999, an increase of $15.2 million, or 5.4%. Excluding PFSweb
revenues, which are included in the December 31, 1999 quarterly results, but not
included in the December 31, 2000 quarterly results, net revenues increased by
8.0%. Net revenues for the nine months ended December 31, 2000 were $866.0
million as compared to $763.0 million for the nine months ended December 31,
1999, an increase of $103.0 million, or 13.5%. Excluding PFSweb revenues, which
are included in the nine months ended December 31, 1999, but are included only
through the spin-off date for the nine months ended December 31, 2000, net
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revenues increased by 14.8%. The Computer and Office Supplies business segment
includes our domestic and international computer and office supplies operations
and IBM product sales. The net revenue increase in the Computer and Office
Supplies business compared to the prior year is primarily attributable to the
Arlington and B.A. Pargh acquisitions (which were not a part of the Daisytek
business last year), growth in the international computer supplies business, and
growth in IBM product sales. Over the last two years, the growth in sales for
the domestic computer supplies business has slowed from previously reported
levels. We believe this reduction is due, in large part, to slower industry
growth and large channel shifts, and is also due to the fact that over the past
year, we have specifically focused on certain margin initiatives that have
improved profitability but reduced revenue opportunities. Additionally, as part
of our ongoing focus on improving our balance sheet position, particularly the
aging of accounts receivable, we have taken positions with certain customers,
including placing them on credit hold, which has also affected revenue growth
but favorably impacted overall financial performance.
Net revenues in the international computer supplies operations increased by
24.2% (in U.S. dollars) in the quarter ended December 31, 2000 compared to the
same prior year period. Excluding revenues from the acquisition of Etertin in
Argentina, growth in this division was 13.8% (in US dollars) for the period.
This result reflects a deterioration in both the Australian and Canadian dollars
relative to the U.S. dollar during this period, compared to last year. Using
local currencies and excluding the acquisition of Etertin, our international
computer supplies operations increased approximately 25.5% this quarter compared
to the same quarter in the prior year. The international division experienced
growth in all regions but Latin America (due to a change in certain tariff
restrictions, which has impacted the local market) and Singapore (whose
operations were moved to our Asia Pacific headquarters in Australia during April
2000). We experienced particularly strong growth rates this quarter in Mexico
and Australia.
Net revenues related to our IBM product sales increased by approximately
31.0% in the quarter ended December 31, 2000, compared to the same prior year
period due to higher sales volumes under both our North American and European
distributor agreements.
Professional Tape Products net revenue decreased 13.7% for the three months
ended December 31, 2000 compared to the same prior year period primarily due to
prior quarters' price degradation in certain product lines throughout fiscal
year 2000. Although we have not experienced any additional price reduction
during the past quarter, we may continue to experience price degradation in our
Professional Tape Products segment in the future, which might have a negative
impact on future growth rates. During the quarter ended December 31, 2000, the
Company began to implement a restructuring plan in this business unit, which
included the closing of certain warehouse facilities, the termination of certain
employees and the repositioning of inventory. We expect to complete this
restructuring during the quarter ending March 31, 2001. We continually evaluate
the business plans and future operating prospects within this business unit as
part of our objective to improve profitability and growth opportunities in this
segment.
Gross Profit. Gross profit as a percent of net revenues was 10.6% for the
three months ended December 31, 2000 as compared to 8.7% for the three months
ended December 31, 1999. Our gross profit percentage for the quarter ended
December 31, 1999 was negatively impacted by certain incremental charges of $1.0
million. Excluding the incremental charges, our gross profit percentage for the
quarter ended December 31, 1999 was 9.0%. Gross profit as a percent of net
revenues was 10.9% for the nine months ended December 31, 2000 as compared to
10.2% for the nine months ended December 31, 1999. Excluding charges for the
nine-month period last year of $4.2 million, gross profit as a percentage of
sales was 10.7%. The increase in gross profit percentage, on a basis adjusted
for these incremental charges, was the result of several different factors. In
the US and international business divisions, the prior year gross profit amounts
for the quarter ended December 31, 1999 reflect the beginning of our intense
focus on improving the key balance sheet areas of inventory and accounts
receivable. In order to make improvements in this area, we avoided certain
vendor incentive programs, which negatively impacted our gross margins during
the three months ended December 31, 1999, that for comparative purposes had been
previously reflected in our results. Since then, we have elected not to
participate in certain of these programs, which are not considered to be in our
long-term best interests. This is part of our focus on improving inventory
levels to strengthen our balance sheet position and improve our overall return
on invested capital. However, the impact to our gross profit percentage in
quarters subsequent to December 31, 1999 has not been as significant. This
increase in gross profit percentage was partially offset by a decline due to the
relatively higher revenue growth in IBM product sales, which are typically at
lower margins. Also, negatively impacting our gross profit percentage was the
reduction in our Professional Tape Products revenue and PFSweb revenue
(resulting from the spin-off), which typically carry higher margin percentages
than the remainder of our business.
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We believe that ongoing competitive pressures in the Computer and Office
Supplies operations, potential further price degradation in the Professional
Tape Products business, and continuing sales increases in our IBM products may
continue to impact gross margins during the next year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") for the three months ended December 31, 2000
were $26.3 million, or 8.8% of net revenues, as compared to $26.5 million, or
9.4% of net revenues, for the three months ended December 31, 1999. SG&A
expenses for the nine months ended December 31, 2000 were $76.2 million, or 8.8%
of net revenues, as compared to $69.9 million, or 9.2% of net revenues, for the
nine months ended December 31, 1999, excluding acquisition related costs and the
reversal of loss on disposition of business in 1999. Our SG&A expenses for the
three and nine month periods ended December 31, 2000 were negatively impacted by
certain non-recurring separation costs of $2.8 million and $5.0 million,
respectively, which are one-time charges primarily related to the spin-off of
PFSweb. Our SG&A expenses for both the three and nine month periods ended
December 31, 1999 were negatively impacted by incremental charges of $0.9
million and $5.3 million, respectively, primarily related to certain
repositioning and separation activities associated with the PFSweb planned
initial public offering, certain other charges as a result of these activities,
and to increase allowances for bad debts related primarily to issues in our
Latin American accounts receivable.
Excluding these incremental charges for all periods, our SG&A percentages
would be 7.9% and 9.1%, respectively, for the three months ended December 31,
2000 and 1999, and 8.2% and 8.5%, respectively, for the nine months ended
December 31, 2000 and 1999. Excluding PFSweb SG&A expenses included in the prior
year results, the increase in overall expenses for both the three and nine month
periods ending December 31, 2000 is due to the acquisitions of Arlington in
October 1999, B.A. Pargh in May 2000, and Etertin effective October 2000. The
decline in SG&A as a percentage of net revenues is primarily attributable to the
significant investments in resources and technology to implement new contracts
and further develop infrastructure for PFSweb during the prior fiscal year. This
impact was partially offset by a reduction in net revenues to certain large
customers, which typically have lower SG&A expense ratios. However, we
experienced a corresponding favorable impact on the increase in IBM product
sales, which typically have lower SG&A expense ratios.
Acquisition Related Costs. In June 1998, we completed the acquisition of
the Tape Company through a stock-for-stock merger, which was accounted for as a
pooling of interest in the accompanying Unaudited Interim Consolidated Financial
Statements and notes thereto. In connection with the transition, integration and
merger activities associated with our Professional Tape Products segment, we
recorded costs of $0.6 million for the nine-month period ending December 31,
1999.
Loss on Disposition of Business. In fiscal 1999, we recorded a charge of
$2.8 million related to the disposition of our professional tape hardware
business. In the quarter ended September 30, 1999, we reversed $1.0 million of
this charge as we were able to avoid some of the costs associated with this
disposition.
Interest Expense. Interest expense for the three months ended December 31,
2000 was $1.6 million as compared to $1.5 million for the three months ended
December 31, 1999. Interest expense for the nine months ended December 31, 2000
was $3.8 million as compared to $3.2 million for the nine months ended December
31, 1999. Interest expense increased over last year, for both the three and
nine-month periods, due to interest rate increases experienced over the last
twelve months, the acquisitions of Arlington, B.A. Pargh and Etertin, and
activity under our share repurchase program. These impacts were partially offset
by proceeds received from the PFSweb initial public offering in December 1999.
The weighted average interest rate was 8.2% and 6.3% during the nine months
ended December 31, 2000 and 1999, respectively.
Income Taxes. Our effective tax rate was 38.5% and approximately zero for
the three months ended December 31, 2000 and 1999, respectively. The effective
tax rate for the nine months ended December 31, 2000 and 1999 was 41.0% and
65.5%, respectively. The effective tax rate is negatively impacted for the three
and nine-month periods ending December 31, 1999, as well as the first quarter of
fiscal 2001, due to losses generated by PFSweb for which no income tax benefit
was recorded. Due to PFSweb's limited operating history in Europe, it was
uncertain whether it was "more likely than not" that we would be able to utilize
the cumulative tax losses and therefore no tax benefit was recorded related to
these losses. Additionally, although PFSweb is included in our consolidated U.S.
tax return through the date of spin-off, for the period between the IPO and the
spin-off, any loss generated by PFSweb, in excess of established limits, may not
be utilized at a consolidated level. Accordingly, no benefit was recorded
related to PFSweb's U.S. operating loss subsequent to their initial public
offering in December 1999. For future periods, we expect our effective tax rate
to approximate the December 2000 quarter effective rate of 38.5%.
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LIQUIDITY AND CAPITAL RESOURCES
We expect to fund our anticipated cash requirements, including the
anticipated cash requirements of our capital expenditures and acquisition
activity, if any, with internally generated funds and other various external
sources of funds that may be available to us. The external sources of funds
include our credit agreements and amendments thereto and may include the future
issuance of debt, equity or other securities. However, we cannot assure you that
we will be able to access capital markets in the future on terms that will be
satisfactory to us. We believe that such internally and externally generated
funds will provide us with adequate liquidity and capital necessary for the next
twelve months.
Over the past year, our primary source of cash has been from operating
activities. Net cash provided by operating activities was $21.6 million for the
nine months ended December 31, 2000 compared to net cash provided by operating
activities of $6.8 million for the nine months ended December 31, 1999. Working
capital, excluding the current portion of long-term debt, decreased to $164.2
million at December 31, 2000 from $196.3 million at March 31, 2000. In December
2000, we entered into an agreement with certain banks for a new credit facility,
which expires in December 2003 and replaces the previous credit facility, which
would have expired on January 1, 2001, resulting in a reclassification of the
outstanding amounts from current liabilities to long-term liabilities. The
reduction in working capital was primarily attributable to the spin-off of
PFSweb on July 6, 2000, which resulted in a reduction in net current assets,
including cash. In addition, our working capital position was impacted during
the period by (1) acquisitions of both the B.A. Pargh and Etertin businesses,
(2) an increase in inventory primarily related to the IBM products, which was
offset by accounts payable associated with this inventory, and (3) a reduction
in accounts receivable due to improved collection efforts in certain business
units during this fiscal year.
Our principal use of funds for investing activities was $22.1 million in
cash related to the disposition of our investment in PFSweb in connection with
the spin-off on July 6, 2000. Additionally, we have used funds for capital
expenditures of $5.3 million and $12.1 million for the nine months ended
December 31, 2000 and 1999, respectively, of which approximately $1.4 million
and $10.8 million, respectively, reflects capital expenditures by PFSweb during
these periods. In addition, we used funds for the acquisition of businesses of
$10.2 million and $20.4 million for the nine months ended December 31, 2000 and
1999, respectively. The capital expenditures consisted primarily of additions to
upgrade our management information systems, costs associated with new
facilities, and historically have also included costs related to the expansion
of PFSweb distribution facilities, both domestic and foreign. We anticipate that
our total investment in upgrades and additions to facilities for fiscal 2001,
excluding the $1.4 million relating to PFSweb during the first quarter, will be
approximately $5 million to $7 million. The Company's former PFSweb subsidiary
had a long-term contractual agreement with one of its clients pursuant to which
PFSweb financed certain of the client's inventory. During fiscal 2000, this
client indicated to PFSweb that they would not have PFSweb finance this
inventory in the future. This financing agreement provided net cash flows of
$1.7 million and $3.4 million for the nine months ended December 31, 2000 and
1999, respectively. Effective with the spin-off of PFSweb on July 6, 2000,
Daisytek no longer has this PFSweb client inventory in its financial results.
Net cash used in financing activities was $11.4 million for the nine months
ended December 31, 2000 compared to net cash provided by financing activities of
$54.7 million for the nine months ended December 31, 1999. In conjunction with
the acquisition of B.A. Pargh during May 2000, certain acquired debt of
approximately $6.5 million was paid in full. In addition, we acquired debt of
approximately $4.7 million in connection with the Etertin acquisition, of which
approximately $1.2 was paid down during the quarter ended December 31, 2000.
This impact was partially offset by proceeds received from the exercise of stock
options and proceeds received on the issuance of stock under an employee stock
purchase program. Cash provided by financing activities for the nine months
ended December 31, 1999, was primarily attributable to proceeds received from
the PFSweb initial public offering. The entire cost of the B.A. Pargh and
Etertin acquisitions was funded through our availability under our credit
facility and cash provided by operating activities. Additionally, during the
second quarter of fiscal year 2001, our Board of Directors initially authorized
a share buyback program of up to 10% of the outstanding shares of common stock.
That program was completed in September 2000 and, at that time, the Board of
Directors authorized an additional 10% repurchase program. As of December 31,
2000 we had acquired approximately 2.99 million shares at a total cost of $18.8
million. In connection with this program, we sold a nine-month option, which
expires in July 2001, for a premium of $50,000, whereby the holder can sell
100,000 shares to us for $4.94 per share. The combination of these factors has
resulted in a net use of funds for financing activities during this period.
At March 31, 2000, our cash balance was primarily related to remaining
proceeds from the PFSweb initial public offering, which were intended to be used
for PFSweb's anticipated capital expenditures and future PFSweb working capital
needs. In connection with the spin-off, this cash balance was retained by
PFSweb.
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In December 2000, we entered into an agreement with certain banks for a new
revolving line of credit facility in the United States (the "Facility") that has
a maximum borrowing availability of $120.0 million and expires on December 19,
2003. The Facility also includes an expandable feature to increase the maximum
borrowing to $170 million, subject to various conditions precedent. Availability
under the Facility is subject to certain borrowing base limitations, including
eligible accounts receivable and inventory, as defined. The Facility replaces
our previous U.S. credit facility, which would have expired on January 1, 2001.
The Facility accrues interest, at our option, at the prime rate of the lead bank
or a Eurodollar rate plus an adjustment ranging from 1.05% to 1.75% depending on
our financial performance. A facility fee of 0.20% to 0.375% is charged on the
entire Facility. The Facility contains various covenants including, among other
things, the maintenance of certain financial ratios including the achievement of
a minimum fixed charge ratio and minimum level of net worth, and restrictions on
certain activities, including loans and payments to related parties, incurring
additional debt, acquisitions, investments and asset sales. This Facility is
secured by a pledge of 100% of the stock of our U.S. subsidiaries and 65% of the
stock of our material foreign subsidiaries. Upon the occurrence of a default,
the Facility will also be secured by our other assets. This Facility is part of
our integrated cash management system in which accounts receivable collections
are used to pay down the Facility and disbursements are paid from the Facility.
This system allows us to optimize our cash flows.
Additionally, in December 2000, our Australian subsidiary entered into an
agreement with an Australian bank for an unsecured revolving line of credit
facility (the "Australian Facility"). This Australian Facility expires on
January 1, 2002 and replaced our previous Australian revolving line of credit
facility, which would have expired on December 31, 2000. The Australian facility
allows us to borrow Australian dollars up to a maximum of $15 million
(Australian) or approximately $8.3 million (U.S.) at December 31, 2000. The
Australian Facility accrues interest at the Australian Bill Rate plus an
adjustment ranging from 1.3% to 2.0% depending on our financial performance. A
facility fee of 0.20% to 0.375% is charged on the entire amount of the
Australian facility.
Also, in December 2000, our Canadian subsidiary entered into an agreement
with a Canadian bank for an unsecured revolving line of credit facility (the
"Canadian Facility"). This Canadian Facility expires on January 1, 2002 and
replaced our previous Canadian revolving line of credit facility, which would
have expired on December 31, 2000. The Canadian Facility allows the Company to
borrow Canadian or U.S. dollars up to a maximum of $5 million (Canadian) or
approximately $3.3 million (U.S.) at December 31, 2000. For Canadian dollar
borrowings, the Canadian Facility accrues interest at the bank's prime rate or
the bank's cost of funds plus an adjustment ranging from 1.3% to 2.0% depending
on our financial performance. For U.S. dollar borrowings, the Canadian Facility
accrues interest at the prime rate of the bank or a Eurodollar rate plus an
adjustment ranging from 1.3% to 2.0% depending on our financial performance. A
facility fee of 0.20% to 0.375% is charged on the entire amount of the Canadian
Facility.
During August 1999, our Canadian subsidiary entered into a separate
agreement with a Canadian bank for a revolving term loan (the "Term Loan"). The
Term Loan, which expires on August 31, 2001, allows us to borrow Canadian or
U.S. dollars up to a maximum of $10.0 million (Canadian), or approximately $6.7
million (U.S.) at December 31, 2000. The Term Loan accrues interest at our
option at either the bank's prime rate plus 0.10% or the bank's U.S. dollar
commercial loan rate plus 0.10%. A commitment fee of 0.25% is charged on the
unused portion of the Term Loan.
At December 31, 2000, our consolidated unsecured revolving lines of credit,
described above, provided for borrowings up to approximately $138.3 million (in
US dollars). There were outstanding balances on the lines of credit totaling
$56.4 million, leaving approximately $81.9 million available for additional
borrowings.
At December 31, 2000, our current portion of long-term debt relates to bank
debt assumed in connection with the acquisition of Etertin in Argentina,
effective October 1, 2000. We are currently evaluating opportunities to obtain a
separate financing arrangement in Argentina for this subsidiary and expect to
either contract for a new facility in Argentina before the end of calendar year
2001 or to finance the working capital requirements of this subsidiary with
availability under the Facility.
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We believe that international markets represent further opportunities for
growth. We attempt to protect ourselves from foreign currency fluctuations by
denominating substantially all our non-Canadian and non-Australian international
sales in U.S. dollars. In addition, we have entered into various forward
Canadian and Australian currency exchange contracts in order to hedge our net
investments in, and our intercompany payables applicable to, our Canadian and
Australian subsidiaries. We have the following forward currency exchange
contracts outstanding as of December 31, 2000:
US$ CONTRACT
CURRENCY TYPE AMOUNT CONTRACT TYPE EXPIRATION
------------------- --------------------- ----------------------- --------------
Canadian Dollars $2.7 million Sell Canadian Dollars January 2001
Canadian Dollars $1.3 million Sell Canadian Dollars April 2001
Canadian Dollars $8.4 million Sell Canadian Dollars May 2001
Australian Dollars $2.1 million Sell Australian Dollars January 2001
Australian Dollars $2.1 million Sell Australian Dollars January 2001
Australian Dollars $6.3 million Sell Australian Dollars April 2001
Australian Dollars $2.6 million Sell Australian Dollars May 2001
As of December 31, 2000, we had incurred net unrealized losses of
approximately $0.7 million on these outstanding Canadian and Australian forward
exchange contracts, which are included as a component of shareholders' equity.
We may consider entering into other forward exchange contracts in order to hedge
our net investment in our Canadian, Australian, Mexican and Argentinean
subsidiaries, although no assurance can be given that we will be able to do so
on acceptable terms.
In the future, we may attempt to acquire other businesses to expand our
existing computer and office supplies businesses in the U.S. or internationally,
expand our product lines (similar to our entry into the office supplies
business) and expand our services or capabilities in connection with our efforts
to grow our business. We currently have no binding agreements to acquire any
material businesses. Should we be successful in acquiring other businesses, we
may require additional financing to consummate such a transaction. Acquisitions
involve certain risks and uncertainties, therefore, we can give no assurance
with respect to whether we will be successful in identifying such a business to
acquire, whether we will be able to obtain financing to complete such an
acquisition, or whether we will be successful in operating the acquired
business.
We believe that we will be able to satisfy our working capital needs for
the next twelve months, as well as business growth and planned capital
expenditures, through funds available under our various line of credit
facilities, trade credit, lease financing, internally generated funds and by
increasing the amount available under our credit facilities. Further, depending
on market conditions and the terms thereof, we may also consider obtaining
additional funds through an additional line of credit, other debt financing or
the sale of capital stock; however, no assurance can be given in such regard.
CONTINGENCIES
The Company is party from time to time to ordinary litigation incidental to
its business, none of which is expected to have a material adverse effect on the
results of operations, financial position or liquidity of the Company.
OTHER MATTERS
Inventory Management
Daisytek manages its inventories held for sale in its wholesale
distribution business by maintaining sufficient quantities of product to achieve
high order fill rates while at the same time maximizing inventory turnover
rates. Inventory balances will fluctuate as we add new product lines and make
large purchases from suppliers to take advantage of attractive terms. To reduce
the risk of loss due to supplier price reductions and slow moving inventory, we
have entered into purchasing agreements with many of our suppliers, including
most of our major suppliers, which contain price protection and stock return
privileges under which we receive credits if the supplier lowers prices on
previously purchased inventory or if we return slow moving inventory in exchange
for other products.
Seasonality
Although historically we have experienced our greatest sequential quarter
revenue growth in our fourth fiscal quarter, our management has not been able to
determine the specific or, if any, seasonal factors that may cause
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quarterly variability in operating results. Our management believes, however,
that factors that may influence quarterly variability include the overall growth
in the non-paper computer supplies industry and shifts in demand for our
computer supplies products due to a variety of factors, including sales
increases resulting from the introduction of new products. We generally
experience a relative slowness in sales during the summer months, which may
adversely affect our first and second fiscal quarter results in relation to
sequential quarter performance.
We believe results of operations for a quarterly period may not be
indicative of the results for any other quarter or for the full year.
Memphis Facility
The majority of our U.S. Computer and Office Supplies inventory and
distribution activity is located in a centralized warehouse and distribution
facility operated by PFSweb in Memphis, Tennessee. Although we have established
certain disaster recovery procedures, which include other warehouse and
distribution locations operated by Daisytek in the U.S., there can be no
assurance that the loss or material diminution in performance of this Memphis
facility for any extended period of time would not have a material effect on our
business.
Inflation
Our management believes that inflation has not had a material effect on our
operations.
Stock Options
In connection with the completion of the spin-off, as of July 6, 2000, all
outstanding Daisytek options ("Daisytek Pre-Spin Options") were adjusted and/or
replaced with Daisytek options (the "Daisytek Post-spin Options") and PFSweb
options (the "PFSweb Post-Spin Options," and together with the Daisytek
Post-spin Options, the "Replacement Options.")
In general, the exercise price and the number of shares subject to each of
the Replacement Options was established pursuant to a formula designed to ensure
that: (1) the aggregate "intrinsic value" (i.e. the difference between the
exercise price of the option and the market price of the common stock underlying
the option) of the Replacement Option does not exceed the aggregate intrinsic
value of the outstanding Daisytek Pre-Spin Option which is replaced by such
Replacement Option immediately prior to the spin-off, and (2) the ratio of the
exercise price of each option to the market value of the underlying stock
immediately before and after the spin-off is preserved.
Substantially all of the other terms and conditions of each Replacement
Option, including the time or times when, and the manner in which, each option
is exercisable, the duration of the exercise period, the permitted method of
exercise, settlement and payment, the rules that apply in the event of the
termination of employment of the employee, the events, if any, that may give
rise to an employee's right to accelerate the vesting or the time or exercise
thereof and the vesting provisions, are the same as those of the replaced
Daisytek Pre-spin Option, except that option holders who are employed by one
company are permitted to exercise, and are subject to all of the terms and
provisions of, options to acquire shares in the other company as if such holder
was an employee of such other company.
As of December 31, 2000, after giving effect to the issuance of the
Daisytek Post-spin Options described above, combined with the additional options
granted during the second quarter of fiscal 2000 discussed in Note 9 of the
Unaudited Interim Consolidated Financial Statements, there were approximately
5.5 million options outstanding with an overall weighted average exercise price
of $7.33.
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The following table summarizes information about the Company's outstanding
stock options as of December 31, 2000:
RANGE OF OPTIONS WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE
--------------- ----------- --------------
$ 1.50 - $ 3.00 288 $ 1.65
$ 5.00 - $ 6.50 2,706,498 $ 6.16
$ 6.51 - $ 8.00 862,336 $ 7.75
$ 8.01 - $ 9.50 1,599,496 $ 8.08
$ 9.51 - $11.00 96,024 $ 9.72
$11.01 - $12.50 16,188 $11.57
$12.51 - $14.00 2,998 $13.22
$14.01 - $15.50 185,501 $14.31
As of December 31, 2000, using the outstanding shares of 14.7 million and
information from the previous table, the following table summarizes the
Company's diluted weighted average shares at various price points:
DILUTED WEIGHTED
AVERAGE AVERAGE SHARES
SHARE PRICE OUTSTANDING
----------- ----------------
$ 7.00 14,895,251
$ 8.00 15,106,287
$ 9.00 15,423,414
$10.00 15,687,181
$11.00 15,907,075
$12.00 16,090,697
$13.00 16,246,531
$14.00 16,380,212
Impact of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") effective for fiscal years
beginning after June 15, 2000. SFAS 133 requires companies to recognize all
derivative financial instruments as either assets or liabilities in the balance
sheet and measure those instruments at fair value. If certain conditions are
met, a derivative may be used to hedge certain types of transactions, including
foreign currency exposures of a net investment in a foreign operation. SFAS 133
requires gains or losses on these financial instruments to be recognized in
other comprehensive income as a part of the cumulative translation adjustment.
In June 1999, the FASB approved the issuance of SFAS 137 deferring the effective
date of SFAS 133 for one year. Consequently, Daisytek is required to adopt SFAS
133 by April 1, 2001. The impact of SFAS 133 on our financial statements will
depend on a variety of factors, including future interpretative guidance from
the FASB, the future level of forecasted and actual foreign currency
transactions, the extent of our hedging activities, the types of hedging
instruments used and the effectiveness of such instruments. We presently utilize
derivative financial instruments to hedge our net investments in some of our
foreign operations and to hedge against interest rate increases. The Company is
currently evaluating the provisions of SFAS 133 and its effect on the accounting
treatment of these financial instruments.
During 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No. 101 requires that
revenue generally is realized or realizable and earned when all of the following
criteria are met: (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred or services have been rendered, (iii) the seller's price
to the buyer is fixed or determinable, and (iv) collectibility is reasonably
assured. SAB No. 101 is effective for our fourth quarter ending March 31, 2001.
We believe the impact of adopting SAB 101 will not be significant to our
financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Daisytek is exposed to various market risks including interest rates on its
debt and foreign exchange rates. In the normal course of business the Company
employs established policies and procedures to manage these risks.
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INTEREST RATE RISK
Our interest rate risk is limited to our outstanding balances on our
revolving lines of credit, which amounted to $59.9 million at December 31, 2000.
To mitigate this risk, we converted $25.0 million of our outstanding balance
from variable interest to a fixed rate of 5.93% for the three-year life of our
new $120.0 million U.S. credit facility. A 50 basis point movement in interest
rates would result in approximately $175,000 annualized increase or decrease in
interest expense based on the outstanding balance of the revolving line of
credit at December 31, 2000.
We anticipate managing our future interest rate exposure by using a mix of
fixed and floating interest rate debt and, if appropriate, financial derivative
instruments.
FOREIGN EXCHANGE RISK
Operating in international markets involves exposure to movements in
currency exchange rates. Currency exchange rate movements typically also reflect
economic growth, inflation, interest rates, government actions and other
factors. As currency exchange rates fluctuate, translation of the statements of
operations of our international businesses into U.S. dollars may affect
year-over-year comparability and could cause us to adjust our financing and
operating strategies. Accordingly, we utilize foreign currency forward contracts
to hedge our net investments and long-term intercompany payable balances. We
also monitor our foreign exchange exposures to ensure the overall effectiveness
of our foreign currency hedge positions. Foreign currency instruments generally
have maturities that do not exceed three months. We do not enter into foreign
currency instruments for speculative purposes.
Our current foreign currency exchange rate risk is primarily limited to
Mexican Pesos, Argentinean Pesos, Canadian Dollars, Australian Dollars and the
Euro. Other international sales and purchases are generally U.S. Dollar based.
At December 31, 2000 we had seven outstanding foreign currency forward
contracts. If the foreign exchange rates of the Canadian and Australian
currencies fluctuate 10% from the December 31, 2000 rates, gains or losses in
fair value on the three outstanding contracts would be approximately $4.0
million, which would offset an underlying opposite gain or loss in our net
position with our hedged international businesses.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information pertaining to this item is incorporated herein from Part 1.
Financial Information (Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Contingencies).
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a) Exhibits.
10.1(*) Credit Facility dated December 14, 2000 from Bank One Canada,
as Lender, to Daisytek Canada, as Borrower, and Daisytek, Inc.
and Daisytek International Corporation, as Guarantors
10.2(*) Guaranty by Daisytek, Inc. and Daisytek International
Corporation for the benefit of Bank One, NA under the Credit
Facility dated December 14, 2000
10.3(*) Demand Note Agreement dated December 14, 2000, from Daisytek
Canada, as Borrower, for the benefit of Bank One Canada.
10.4(*) Credit Agreement dated December 18, 2000 among Daisytek,
Incorporated, as Borrower, Daisytek International Corporation,
as Guarantor, with the banks listed therein as Lenders, Bank
One, N.A., as an LC Issuer and Bank One, Texas, N.A., as
Administrative Agent
10.5(*) Parent Guaranty dated December 18, 2000 by Daisytek
International Corporation for the benefit of the Lenders and
the LC Issuer under the Credit Agreement
10.6(*) Subsidiary Guaranty dated December 18, 2000 by Certain
Subsidiaries of Daisytek International Corporation for the
benefit of the Lenders and the LC Issuer under the Credit
Agreement
10.7(*) Pledge and Security Agreement dated December 18, 2000 between
Daisytek, Incorporated and Steadi-Systems, Ltd., as
Co-Pledgors and Bank One, Texas, NA, as Administrative Agent
for the LC Issuer and the Lenders under the Credit Agreement
10.8(*) Security Agreement dated December 18, 2000 by and among
Daisytek, Incorporated and its domestic subsidiaries a party
thereto and Bank One, Texas, NA
10.9(*) Credit Agreement dated December 18, 2000 between Daisytek
Australia Pty Ltd., as Borrower, and Bank One, NA, as Lender
- ----------
(*) Filed herewith
b) Reports on Form 8-K:
1. On November 21, 2000, the Company filed a current report on
Form 8-K to report, under Item 5, the resignations of Mark C.
Layton, James F. Reilly and Timothy M. Murray as members of
the Company's board of directors. In addition, the Company
also reported the appointment of Nicholas A. Giordano to its
board of directors.
2. On December 22, 2000, the Company filed a current report on
Form 8-K to report, under Item 4, the dismissal of Arthur
Andersen LLP as the Company's independent public accountants
and the engagement of Ernst & Young LLP as the Company's
independent public accountants for the fiscal year ending
March 31, 2001.
3. On December 27, 2000, the Company filed a current report on
Form 8-K to report, under Item 5, a new credit facility
entered into by its wholly-owned subsidiary, Daisytek,
Incorporated.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 14, 2001
DAISYTEK INTERNATIONAL CORPORATION
By: /s/ Ralph Mitchell
------------------------------------
Ralph Mitchell
Chief Financial Officer,
Chief Accounting Officer,
Executive Vice President - Finance
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTI0N
- ------ -----------
10.1(*) Credit Facility dated December 14, 2000 from Bank One Canada, as
Lender, to Daisytek Canada, as Borrower, and Daisytek, Inc. and
Daisytek International Corporation, as Guarantors
10.2(*) Guaranty by Daisytek, Inc. and Daisytek International Corporation for
the benefit of Bank One, NA under the Credit Facility dated December
14, 2000
10.3(*) Demand Note Agreement dated December 14, 2000 from
Daisytek Canada, as Borrower, for the benefit of Bank One Canada
10.4(*) Credit Agreement dated December 18, 2000 among Daisytek, Incorporated,
as Borrower, Daisytek International Corporation, as Guarantor, with the
banks listed therein as Lenders, Bank One, N.A., as an LC Issuer and
Bank One, Texas, N.A., as Administrative Agent
10.5(*) Parent Guaranty dated December 18, 2000 by Daisytek International
Corporation for the benefit of the Lenders and the LC Issuer under the
Credit Agreement
10.6(*) Subsidiary Guaranty dated December 18, 2000 by Certain Subsidiaries of
Daisytek International Corporation for the benefit of the Lenders and
the LC Issuer under the Credit Agreement
10.7(*) Pledge and Security Agreement dated December 18, 2000 between Daisytek,
Incorporated and Steadi-Systems, Ltd., as Co-Pledgors and Bank One,
Texas, NA, as Administrative Agent for the LC Issuer and the Lenders
under the Credit Agreement
10.8(*) Security Agreement dated December 18, 2000 by and among Daisytek,
Incorporated and its domestic subsidiaries a party thereto and Bank
One, Texas, NA
10.9(*) Credit Agreement dated December 18, 2000 between Daisytek Australia Pty
Ltd., as Borrower, and Bank One, NA, as Lender
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(*) Filed herewith